Tanker Deal: Why Boeing Shouldn't Protest


Despite its dismay over losing a huge Air Force contract, Boeing doesn't want to delay a plane the military needs

Boeing (BA) executives, bewildered at losing a multibillion-dollar contract for a fleet of refueling tanker aircraft, are girding for battle as they lay legal groundwork for kicking up a more official fuss—the filing of a formal protest of a U.S. Air Force decision to buy from Northrop Grumman (NOC) and partner European Aeronautic Defence & Space (EAD.PA).

But even with billions at stake, shares tumbling, and an anticipated dent in earnings, there are some good reasons why Boeing shouldn't complain—and just might not. Sources say these downsides, too, are being debated in the company's executive suite and that no decision on a protest will be made until after a Pentagon briefing on the matter. Explains one Boeing source: "We certainly wouldn't want to aggravate our customer"—the Air Force.

Even crafting a statement the company issued Mar. 4 proved painstakingly tedious, as insiders strived to strike a balance in tone. Executives wanted to convey their sense that the company was misled by the Air Force. If Boeing had known the Air Force was seeking a plane with more fuel-carrying capacity and cargo space, say company insiders and a congressional source, it would have based its proposal on the larger Boeing 777 instead of the 767. The statement by Mark McGraw, Boeing's vice-president for 767 tanker programs, sidestepped some of the details but got to the point: "There may well have been factors beyond those stated in the [Air Force request for proposal], or weighted differently than we understood they would be, used to make the decision."

Boeing also complained about having to wait until Mar. 12 for a formal briefing on why it was not selected, but received the hearing on Mar. 7. Company spokesman Dan Beck said then that Boeing won't be deciding whether to file a formal protest for "a few days." The company then has 10 days. But a protest might not be necessary. Congress has already stepped into the fray, grilling two top Air Force acquisition officials, Sue Payton and Lt. Gen. John "Jack" Hudson, at a Mar. 5 hearing of the House Defense Appropriations subcommittee, during which the Democratic chairman, John Murtha of Pennsylvania, reminded them that Congress has the power of the purse and can cancel the contract.

Patchwork Planes

The realities are complex. A protest could add yet another yearlong delay to replacing the military's aged fleet of KC-135 Stratotankers. These Dr. Strangelove-era airborne gasoline stations first entered service in the 1950s and are routinely falling apart and patched up. Yet they remain critical to U.S. global warfighting because they enable U.S. fighter jets and bombers to continue missions rather than return to aircraft carriers or bases.

A protest also could prolong attention to a series of embarrassments and turbulence for Boeing in recent years, including a scandal involving an earlier replacement tanker bid. Boeing also had troubles delivering tankers to other countries. And development of its high-tech "virtual fence" along the U.S.-Mexican border has been plagued with so many problems that deployment is now stalled.

Boeing has had difficulties on the commercial airliner side as well. Delays in the 787 Dreamliner over the last six months have depressed the company's stock. The tanker deal, while potentially worth $100 billion over its life, amounts to a less impressive revenue source on an annual basis. But it represents one of the largest military aircraft contracts in modern times, and comes at a point when projected sales increases for Boeing's defense unit are modest—only about $1 billion above the current $32 billion a year.

Even before the Gulf War, the nation's fleet of Stratotankers was stretched thin and at risk of having trouble with failing parts and systems that would ground too many tankers at once. Some of the planes have plywood floors, cockpit windows that come loose, and cracks in the landing gear—among countless other costly maintenance headaches. Putty holding parts in place sometimes give the planes the appearance of having Band-Aids, which is essentially what they are. Before each Stratotanker takes off, a maintenance crew must check hundreds of items on a list the size of a phone book. The inspections require eight hours, compared with only two hours for the average modern jet. Sometimes, mechanics unable to find replacement parts have had to improvise their own. Once, in 2003, parts fell from a landing KC-135, prompting repairs to flaps on 14 planes.

Strategic risks and soaring maintenance costs made the Air Force eager for a new fleet—years ago. But bureaucracy and scandal delayed acquisition, most recently in 2003 when the Air Force, after a congressional investigation spearheaded by Senator John McCain (R-Ariz.), halted an order to lease 100 tankers from Boeing.

Prepare for Hearings

The Air Force now intends to "debrief" Boeing on Mar. 7, providing a detailed explanation about why it lost the contract. Boeing then has 10 days to file a protest with the Government Accountability Office. A decision from the GAO, which has adjudicated a rising number of protests from defeated contractors in recent years, could take 100 days.

If Boeing persists in a protest, the public noise surrounding the controversial award won't likely subside, either; the railing of Boeing supporters, Presidential candidates on the campaign trail, and grumbling by labor unions in recent days would likely have echoes in congressional hearings, possibly leading to still more delays in replacing the nation's refueling tankers. House Speaker Nancy Pelosi (D-Calif.) said Mar. 4 that Congress will schedule hearings on the Air Force decision. Pelosi said in a statement that the award to Northrop Grumman "raises serious questions that Congress must examine thoroughly."

While the Air Force has declined to disclose details of its extensive internal deliberations over the tanker contract, the choice may have been easier than advertised. Boeing, in fact, may have been woefully far behind. Loren Thompson, a Lexington Institute defense analyst well connected and widely respected in the Pentagon, said Mar. 3 that "Northrop Grumman's victory was not a close outcome."

While both Boeing and Northrop Grumman satisfied requirements established by the Air Force, Northrop was clearly the better buy. With Northrop, the military could have "49 superior tankers operating by 2013," Thompson said, while Boeing's proposal would give it "only 19 considerably less capable planes" by then.

Measuring Up the Aircraft

World markets, politicians, labor unions, and others may have been stunned by the upset, but Thompson insists that "Boeing didn't manage to beat Northrop in a single measure of merit"—not in flight range, fuel capacity, speed of delivery, or cost. "Boeing would have to find a lot of problems to overturn this outcome," Thompson tells BusinessWeek. The Northrop tanker carriers 250,000 pounds of fuel, compared to 202,000 on Boeing's—a crucial difference considering that refueling tankers must often circle for many hours when military operations require.

Thompson's information, which he disclosed Mar. 3, irritated Boeing officials, who are now seeking ways to craft a delicate statement that criticizes the military for speaking with Thompson and some members of Congress before explaining in detail to the company why it lost. Thompson, for his part, is a longtime military analyst with deep ties to the top military brass and defense contractors. Boeing executives also are said to be troubled by a "disconnect" between what the military said it wanted and the reasons given by the Air Force for why it chose Northrop. Now Boeing must wait a week before hearing from the Air Force the detailed reasons for its defeat.

Air Force officials are eager to put the controversy behind them and secure the tankers they need. And, in considering a protest, Boeing may risk delaying an overdue overhaul of the U.S. military's airborne backbone to refight a battle it can't win.


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